Q&A: the dollar is down and a prolonged crisis could damage consumer spending, confidence and China's attitude to US debt

Ron Milligan's insight:

Source: http://www.theguardian.com/business/2013/oct/01/us-shutdown-markets-global-economy How have financial markets reacted to news of the shutdown? US markets were closed by the time the formal notices started going out late on Monday night ordering government agencies to suspend their activities – the so-called shutdown. But on international markets overnight and on Tuesday morning, the dollar has lost around half a percent of its value, pushing the pound up to $1.6238 – the highest level since 3 January 2013. The euro has risen to $1.357, the highest level since early February. However, international stock markets were largely unmoved by the crisis – French and German shares, for example, were up around 0.5% – with most investors expecting the shutdown to be short-lived, and the impact largely confined to the US. Some analysts said investors may also be reasoning that the crisis could delay the so-called "tapering" of the Federal Reserve's recession-busting policy of quantitative easing, which helps inflate share prices by pumping cheap money into financial markets. Ilya Spivak, currency strategist at Daily FX, said: "The somewhat counter-intuitive response seems to reflect investors' continued pre-occupation with the direction of US monetary policy. Filtered through this prism, the shutdown and its negative implications for US growth are seen as delaying a move to 'taper' QE asset purchases, which seems to be driving a swell in risk appetite." So does that mean it's just a little local difficulty for the Americans? Yes and no. The direct economic hit may be relatively small: analysts at the ratings agency Moody's suggest a week-long outage could cut a relatively manageable 0.3% off GDP. But a serious knock to confidence could rattle consumers and investors at a crucial time. The US recovery remains fragile, as the Fed stressed last month when it decided to continue buying $85bn (£52bn)-a-month worth of bonds, instead of "tapering" QE. A major wobble, throwing the spotlight back on to the health of the US public finances, is the last thing the nascent upturn needs; and it could also exacerbate markets' anxiety in the run-up to the potentially fraught debate over raising the government's budget ceiling in mid-October. How will the UK be affected? If the shutdown is short-lived, probably very little; if it is prolonged, then the uptick in sterling could continue, and a stronger pound is the last thing George Osborne wants as he tries to rebalance the economy towards exports, so that Britain can "pay its way in the world". There is also a risk that as investors turn their minds to the dangers of debt-burdened developed economies struggling to generate a sustainable upturn, they start to scrutinise the policies of other such states – including the UK. George Osborne's grim pledge in his Conservative party conference speech that austerity will continue until 2020 may partly have been aimed at reminding international markets that the UK system is different to America's, and he has no intention of being diverted from his deficit-cutting course. What about the rest of the world? Any prolonged shutdown would rapidly start to hit US consumer spending, as hundreds of thousands of public sector workers are furloughed; and that will crimp America's demand for imports from the rest of the world. At the margins, weaker investor confidence, and the dollar depreciation that has so far been the main financial impact of the shutdown, could also slow the flood of capital into the US that was one of the key trends in international markets over the summer. The switch from riskier markets to the perceived safety of America drove up exchange rates and bond yields in many emerging economies, forcing central banks in several countries, including India and Brazil, to take emergency action. A renewed sense of crisis in the US is likely to stem that flow, particularly after the Fed had already raised questions about the health of the US economy when it declined to "taper" QE in September. What will China think? Beijing's attitude is the key to one of the more subtle potential implications of this latest budgetary wrangle. China holds a mountain of US assets, mostly Treasury bonds, effectively IOUs from Washington – the by-product of running huge trade surpluses over the past decade and a deliberate policy to keep the Chinese currency, the yuan, cheap. However, Chinese politicians have repeatedly expressed concern over recent years about the growing risks of this large exposure to the US, as Washington has appeared increasingly unable to bring tax-and-spending policy under control. When the US was stripped of its AAA credit rating by Standard & Poors in August 2011, after a previous partisan wrangle over raising the government's debt ceiling – not a problem suffered in autocratic single-party states – China reacted with fury. Xinhua, the official news agency, said: "The days when the debt-ridden Uncle Sam could leisurely squander unlimited overseas borrowing appear to be numbered. To cure its addiction to debts, the US has to re-establish the common sense principle that one should live within its means." Since then China has deliberately moved towards making the yuan more convertible on international markets, which would allow it to appreciate, and reduce the need to pile up potentially risky US debts – a policy that in the long term could remove the biggest buyer of US debt from the markets, potentially making it far more costly for America to borrow. Simon Derrick, of BNY Mellon, suggested the lack of outraged comment over the current budget impasse may suggest "the Chinese government has already made its mind up about what it needs to do and sees little point in complaining any further".

South Korea’s supreme court has ordered a review of the fraud conviction of one of the country’s leading businessmen, reviving what is widely seen as a test case of the judiciary’s approach to criminal behaviour among the corporate elite.

Ron Milligan's insight:

Source

South Korea’s supreme court has ordered a review of the fraud conviction of one of the country’s leading businessmen, reviving what is widely seen as a test case of the judiciary’s approach to criminal behaviour among the corporate elite.

Kim Seung-youn, chairman of Hanwha Group – one of South Korea’s largest chaebol conglomerates – was given a four-year jail sentence and $4.5m fine in August last year, after being convicted of misusing company funds.

However, the supreme court ordered on Thursday that Mr Kim’s case should be examined again by a lower court, saying that more detailed proof was needed to justify the sentence. Mr Kim’s sentence had already been commuted to three years, and he has been in hospital since January on account of depression and breathing problems.

Thursday’s decision opens the possibility of a reduction in a sentence that was hailed as reflecting a newly tough approach towards business leaders, amid popular unhappiness at the perceived excessive power of the major corporations. Previous convictions of chaebol chiefs – including Mr Kim, Lee Kun-hee of Samsung and Chung Mong-koo of Hyundai – had typically resulted in suspended sentences.

“The media here regard [Mr Kim] as the epitome of what is bad about the chaebol,” said Shim Jae-hoon, an independent political commentator, citing Mr Kim’s previous suspended sentence for abducting and assaulting workers in a karaoke bar. “The courts are mindful of public opinion on this case . . . I don’t think they will let him off the hook.”

A second highly anticipated decision will come on Friday, when a court will rule on an appeal by Chey Tae-won, chairman of SK Group, another of the country’s biggest business groups. Mr Chey was sentenced to four years in prison in January, for embezzling company funds for use in personal investments.

Some analysts viewed the courts’ stern treatment of Mr Kim and Mr Chey as reflecting the political mood of last year’s presidential campaign ], in which the leading candidates promised to deliver “economic democratisation”. Park Geun-hye, president since February, has promised to abandon the practice of her predecessor Lee Myung-bak, who pardoned several business leaders on the basis of their importance to the economy.

Kim Sang-jo, an economics professor at Hangsung University, said that any dilution of Mr Kim’s or Mr Chey’s sentence would be taken as a sign of diminished resolve from the courts. “Last year, the judiciary took a tougher stance against tycoons convicted of white collar crimes, but its attitude seems to be changing as politicians step back from their push for economic democracy,” he said.

However, Lee Ji-soo, an analyst at the Centre for Good Corporate Governance in Seoul, said it was too early to criticise the supreme court’s decision. “It’s a technical aspect . . . in order to prove the case, the supreme court is demanding the lower court show some more findings,” he said. “I don’t think there’s anything wrong with that.”

Independence could diminish the UK’s voice on the world stage and deprive Scotland of the benefits of its collective clout, former Chancellor Ken Clarke has told business leaders.

Ron Milligan's insight:

He focused on the impact of independence on the UK and Scotland’s place in the world when he addressed the Institute of Director’s leadership conference in Aberdeen.

The UK Government’s Minister without Portfolio also said the result of next year’s referendum is far from being a foregone conclusion.

“We have experienced the worst financial crisis in my lifetime. The longest and deepest recession since the war. The global economy is still in a fragile state. The Middle East in turmoil. Worldwide terrorism is a serious threat,” the Tory MP said.

“Getting through all this requires us urgently to boost the United Kingdom’s voice in the world, not to diminish it. We need to improve our overseas presence, not cut it up into little segmented pieces.

“As the United Kingdom, we are one of the very most leading countries inside the largest economic bloc in the world: the EU. We are one of five countries with a permanent seat on the Security Council of the UN. We are members of the G8 and G20. These are unprecedented opportunities to fight for the best interests of our citizens.

“With one throw of the dice, Scottish independence would deprive Scotland of the benefits of this collective clout.”

Speaking on the eve of the day which marks exactly one year until the vote, Mr Clarke said: “Alex Salmond is having difficulty making his case but the result is very far from being a foregone conclusion. I personally hope that the result at the end of it all is a resounding No to independence.

“But I also hope that a second product of this several years of national soul searching is a resounding Yes to the United Kingdom. That would be good for Aberdeen, good for Scotland, good for England, good for us all.”

An SNP spokesman said: “Mr Clarke wants David Cameron to speak for Scotland on the world stage but with a Yes, we can speak with our own voice and that is so much better.

“It is not wise for a Tory minister to go to Aberdeen of all places to tell Scots that Westminster is best to look after our interests internationally given that successive Tory governments have regularly sold out one of Scotland’s most important industries, the fishing industry, in negotiations in Europe.

“With Scotland’s future in Scotland’s hands, we can make Scotland’s wealth and resources work better for the people living in Scotland and that includes making much more of our great international reputation to deliver jobs and opportunities for the people of Scotland.”

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